In recent months, we have seen a stream of bad news and commentary on the status of the US currency. From rappers to supermodels to the Taj Mahal, everyone prefers the euro. I even read that kidnappers now want ransoms paid in 500 euro notes, rather than dollars. Mark Twain, who wrote after the accidental publishing of his obituary that ‘reports of my death have been greatly exaggerated’, springs to mind.

Remember, when trading currencies you are always buying the strength of one country’s currency and selling the weakness of the other. While the US has many well-documented economic problems, let us not think that Euroland is some sort of perfect economy: far from it. I have often stated that it is hard to find a decent currency and it has been a case of buying the best of a bad bunch.

Euro heading for a fall
Recent interest rate cuts by the US Federal Reserve, of over 1.25 per cent in just over a week, represented historic moves. These cuts should have sent the dollar plunging and the euro soaring, yet they did not. In fact, the euro failed to make it over $1.50.

As the chart shows, we have been in a consolidation for some months. For now, $1.43 seems to be the support. However, I see this giving way towards the end of 2008. My target for the euro/USD rate before the year-end is $1.36 from the recent $1.48 levels. The dollar weakened 10.6 per cent in 2007 and 11.4 per cent in 2006 after strengthening by 12.6 percent in 2005. 2008 could see a strengthening of around ten per cent. I also see the European Central Bank (ECB) finally forgetting about inflationary worries and concerns and beginning to cut interest rates. From the current four per cent, I envisage rates steadily falling to 3.25 per cent by the year-end. The first cut from the ECB will come as soon as April.

I’m still no fan of the dollar and I have been short on it for most of the past five years. However, nothing goes up or down in a straight line, and this trade is based on a lot of bad news being factored into the US dollar, with little being factored into the euro and, until recently, the British pound.

One of the easiest ways to short the euro with a strictly limited risk is to use a covered warrant. You could look at the SG 1.40 euro/USD Put (ticker code: SX55) currently trading at around 11p. The alternative is to short the December 2008 euro/USD and make sure you have a very big stop, say 1.55 to be safe. Just to recap – you purchase a covered warrant via a stockbroker and they are listed like shares on the LSE; no stamp duty is payable but you will pay your normal stockbroker’s commission.

On the subject of currencies, the British pound is looking bearish. After hitting the $2.10 level, we have seen a sharp sell-off, with the psychological two dollars to the pound level broken. While we will see some attempt to regain the two to one level, I don’t see this holding and I am looking for a fall back to $1.90 and then down to $1.80 before the year-end. You could look to trade this idea with a covered warrant as well – use the 1.90 GBP/USD Put, which has a December 2008 expiration, currently trading at around 26p.

While we recently saw the pound looking strong against the US dollar, the pound has been hitting new all-time lows against the euro. The pound is also giving a sell signal against the yen, Swiss franc, Canadian dollar and Australian dollar, to name a few.

Gold
I am looking for the euro to start weakening against the US dollar. While this is traditionally a bad sign for gold, I think Far Eastern buying will provide support. We have made a new push up to the $950 level, with many calling for $1,000 any day now, but calm is needed. Yes, we will see gold hit $1,000, but not all in a straight line. Gold will take a pause and consolidate around the $830 to $930 level for a few months, before pushing up for the big break to $1000.

As a longer-term trader it would be a good idea to look at adding to gold trades on bad days – anywhere near the lower $850 mark will prove a good buying level.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced at £347. For more details, visit www.fintrader.net or call 01189 476630.